WASHINGTON (MarketWatch) -- Private investors seeking to participate in the Treasury Department's program to clear $1 trillion in so-called toxic mortgages and other assets from banks must submit their applications by Friday.

However, many private securities managers believe the program is doomed to failure."Investors don't want to buy a piece of dirt where they have to build something," said Richard Lashley, co-founder of Naperville, Ill.,-based hedge fund PL Capital LLC. "They don't want to have to go to Iowa and work on a construction project."

At issue is a program that aims to strengthen banks to get them to lend again by having private investors and the Treasury put in equal amounts of money backed by a loan guarantee from the Federal Deposit Insurance Corp. to buy troubled loans and mortgage-backed securities from banks. Private investors will also be eligible to buy other securitized products such as packaged auto loans and student debt products. Auctions for the toxic assets are expected in June.

Nevertheless, a variety of private investment vehicles, including mutual funds, private equity and hedge funds, are all contemplating participation in one of two programs. One program seeks to bring in private investors to buy individual loans from troubled banks. The other program, which is more substantial, seeks to buy securitized mortgages and other packaged products from financial institutions.

Treasury will consider the applications and ultimately choose five large private investors in the coming weeks that meet a variety of requirements including an ability to raise $500 million in private capital, including retail investors.

However, private investors argue that regional loan securities for undeveloped land is not something most private investors who normally prefer buying securitized products will be interested in buying, in part, because investors won't want to do the local research necessary to identify the value of these securities. Investors also are unlikely to be interested in buying packaged subprime mortgages that were based on misrepresentation and fraud, he added.

New accounting guidance from the Financial Accounting Standards Board approved last month also gives banks additional flexibility in how they value some of their illiquid mortgage securities. The result: banks will be less likely to sell some toxic assets that they can instead report on their books in a favorable manner.

Banks continue to be wary about the price at which they sell their assets. Ironfire Capital LLC director Eric Jackson argues that banks are wary about selling assets because the price it sells for will determine the value of a wide variety of their other assets. Banks, he said, will have to mark down a lot of their assets to the price the asset sold for in the auction.

"Banks don't want to sell the best assets, buyers don't want to buy," said Jackson. "Buyers still worry about losing their capital, even if the government is taking on a lot of the purchase price."

Kenneth Lore, partner at Bingham McCutchen, said he believes private investors are worried that the government may impose additional restrictions on their investment.

"Many are afraid of working with the government on any level because of restrictions on pay and other conditions that have happened to people that have worked with the government," Lore said. "Some might think, 'If I make too much money, I'll be criticized.'"

PL Capital's Lashley added that he believed the only way to make the public-private partnership fund work would be for Treasury to set up regional offices where a small developer could gettogether with a distressed investor and government financing.

Treasury may provide localized auction opportunities. Treasury is expected to release details of its rules for auctions in the coming weeks.

According to Robert Lee, a managing director at Keefe, Bruyette & Woods in New York, some institutions and buyout shops may have a difficult time meeting some of the participation criteria. He pointed out that buyout shops generally are not experienced at selling products to retail investors - one of the requirements of the program. However, he added that private equity shops could team up with other private investors to qualify.

A number of investors are considering applying for the program, including BlackRock Inc., Invesco, Legg Mason's Western Asset Management, PIMCO and AllianceBernstein, according to Lee. Some private equity companies also have expressed an interest, including Blackstone and Carlyle Group. Other private investors, including John Paulson & Co., could be interested as well.Peter McKillop, a spokesman for Kohlberg Kravis & Roberts, said the buyout shop is considering the program. However, he declined to comment on whether KKR will submit an application Friday.

"We are supportive of the program and think it's a great first step and we are interested in future participation," McKillop said.

Lee expects Treasury to pick five large investors that will then have time to raise retail and other capital if they don't already have it.

WASHINGTON (MarketWatch) -- Private investors seeking to participate in the Treasury Department's program to clear $1 trillion in so-called toxic mortgages and other assets from banks must submit their applications by Friday.

However, many private securities managers believe the program is doomed to failure."Investors don't want to buy a piece of dirt where they have to build something," said Richard Lashley, co-founder of Naperville, Ill.,-based hedge fund PL Capital LLC. "They don't want to have to go to Iowa and work on a construction project."

At issue is a program that aims to strengthen banks to get them to lend again by having private investors and the Treasury put in equal amounts of money backed by a loan guarantee from the Federal Deposit Insurance Corp. to buy troubled loans and mortgage-backed securities from banks. Private investors will also be eligible to buy other securitized products such as packaged auto loans and student debt products. Auctions for the toxic assets are expected in June.

Nevertheless, a variety of private investment vehicles, including mutual funds, private equity and hedge funds, are all contemplating participation in one of two programs. One program seeks to bring in private investors to buy individual loans from troubled banks. The other program, which is more substantial, seeks to buy securitized mortgages and other packaged products from financial institutions.

Treasury will consider the applications and ultimately choose five large private investors in the coming weeks that meet a variety of requirements including an ability to raise $500 million in private capital, including retail investors.

However, private investors argue that regional loan securities for undeveloped land is not something most private investors who normally prefer buying securitized products will be interested in buying, in part, because investors won't want to do the local research necessary to identify the value of these securities. Investors also are unlikely to be interested in buying packaged subprime mortgages that were based on misrepresentation and fraud, he added.

New accounting guidance from the Financial Accounting Standards Board approved last month also gives banks additional flexibility in how they value some of their illiquid mortgage securities. The result: banks will be less likely to sell some toxic assets that they can instead report on their books in a favorable manner.

Banks continue to be wary about the price at which they sell their assets. Ironfire Capital LLC director Eric Jackson argues that banks are wary about selling assets because the price it sells for will determine the value of a wide variety of their other assets. Banks, he said, will have to mark down a lot of their assets to the price the asset sold for in the auction.

"Banks don't want to sell the best assets, buyers don't want to buy," said Jackson. "Buyers still worry about losing their capital, even if the government is taking on a lot of the purchase price."

Kenneth Lore, partner at Bingham McCutchen, said he believes private investors are worried that the government may impose additional restrictions on their investment.

"Many are afraid of working with the government on any level because of restrictions on pay and other conditions that have happened to people that have worked with the government," Lore said. "Some might think, 'If I make too much money, I'll be criticized.'"

PL Capital's Lashley added that he believed the only way to make the public-private partnership fund work would be for Treasury to set up regional offices where a small developer could gettogether with a distressed investor and government financing.

Treasury may provide localized auction opportunities. Treasury is expected to release details of its rules for auctions in the coming weeks.

According to Robert Lee, a managing director at Keefe, Bruyette & Woods in New York, some institutions and buyout shops may have a difficult time meeting some of the participation criteria. He pointed out that buyout shops generally are not experienced at selling products to retail investors - one of the requirements of the program. However, he added that private equity shops could team up with other private investors to qualify.

A number of investors are considering applying for the program, including BlackRock Inc., Invesco, Legg Mason's Western Asset Management, PIMCO and AllianceBernstein, according to Lee. Some private equity companies also have expressed an interest, including Blackstone and Carlyle Group. Other private investors, including John Paulson & Co., could be interested as well.Peter McKillop, a spokesman for Kohlberg Kravis & Roberts, said the buyout shop is considering the program. However, he declined to comment on whether KKR will submit an application Friday.

"We are supportive of the program and think it's a great first step and we are interested in future participation," McKillop said.

Lee expects Treasury to pick five large investors that will then have time to raise retail and other capital if they don't already have it.

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